Do sole traders need a business bank account?

Running your own business comes with its challenges – managing daily tasks, handling taxes, finding new clients, and marketing your services can make for a busy week. With so much to juggle, it’s tempting to stick with what you know when it comes to managing your business finances.

However, using a personal bank account may limit your access to features tailored for sole traders. This guide explores the pros and cons of a business bank account to help you determine if it’s the right fit for you.

Key takeaways

• A business bank account is not a legal requirement for sole traders

• Separating business and personal finances makes bookkeeping and tax returns more efficient and less risky

• A business account shows customers and clients that you’re professional and credible

Can I use a personal bank account as a sole trader?

There’s no legal issue with using a personal bank account as a sole trader, but while you can manage your finances as you choose, using your personal bank account can make it difficult to quickly distinguish between personal and business expenses. In business, having a clear understanding of your financial outlook and cash flow is important, and that can be challenging if you run everything through one personal account. 

It’s important to note that this does not apply to limited companies – as separate legal entities, limited companies must always keep their finances distinct from those of the owner or director.

The advantages of a business bank account

There are many advantages of having a business bank account if you’re a sole trader. Let’s break them down:

Shows you’re professional and credible

A business bank account shows you are serious about your business. When making and receiving payments, using a business account signals professionalism to potential customers and clients, helping to build trust. 

Separates your business and personal finances

Running everything through a personal bank account makes bookkeeping difficult. Sorting through statements to separate personal expenses from business expenses is inefficient and time-consuming. This approach can also obscure the true financial state of both your personal and business finances.

Provides access to helpful banking features

A business bank account offers features tailored to help with financial management. These include accounting software, invoicing tools, simple foreign currency transactions, payroll management and business overdraft facilities.

Simplifies your tax obligations

Keeping a clear record of income and expenses helps you easily calculate profits and losses, ensuring accurate tax returns. It also streamlines the process of claiming business-related expenses and provides the documentation needed if HMRC requests proof of your expenditures.

The disadvantages of a business bank account

Although a business bank account offers many benefits, there are a few factors to keep in mind:

Additional fees

Many business bank accounts have monthly or annual fees, including account fees, overdraft fees and transaction fees. These can add up, especially if you’re still building up your business. 

Setup time

Opening a business bank account can take longer than a personal account due to the need for additional documentation, such as proof of business activity, which may delay access to your account.

Possible confusion

Even with a business bank account, it’s still easy to mix personal and business expenses if you're not careful. As a sole trader, you're personally liable for all business debts, so it’s important to monitor your finances carefully to avoid confusion.

Additional administration 

Opening a new bank account and managing two accounts involves additional admin. While the benefits often outweigh the drawbacks, the extra hassle may not be worth it if your business transactions are straightforward.

What should I consider when choosing a business bank account?

When it comes to choosing a business bank account, you should keep the following in mind: 

• Fees: Check for monthly, annual, transaction and overdraft fees. Business accounts vary, so it’s worth shopping around and comparing options

• Eligibility: To open a business bank account in the UK, you generally need to be 18 or over, based in the UK, and be running a business. However, there may be additional requirements. Be sure to check these before applying and ensure you have the necessary documentation

• Access: Find out if you can access the account when needed. Does the bank offer online banking? If you prefer in-person visits, is there a branch nearby? 

• Features: Verify that the account provides the features you need, such as accounting software or invoicing tools 

• Reputation and customer support: Research the bank’s reputation. Does it offer reliable customer support and secure business banking? 

Read more: Do you need a business bank account?